By Marco BösingWhat Is a Limit Order?
A limit order is a trading instruction that executes only at a specified price or better. A limit buy order fills at the limit price or below; a limit sell order fills at the limit price or above.
The defining characteristic of a limit order is: it guarantees price, but not execution. If the market price never reaches the limit level, the order remains unexecuted in the order book.
Limit Orders and Liquidity
In order flow analysis, limit orders are the passive order type. They provide liquidity to the market by waiting at a specific price level until a market order meets them:
- Limit buy orders (bids) sit in the order book below the current price and provide buying liquidity
- Limit sell orders (asks/offers) sit above the current price and provide selling liquidity
The totality of limit orders at all price levels forms the order book and determines the available liquidity of the market.
Limit Orders in the Order Book
In the DOM (Depth of Market), limit orders are displayed as bid and ask sizes at each price level:
- Deep bid liquidity: Many limit buy orders below the current price suggest potential support
- Deep ask liquidity: Many limit sell orders above the current price suggest potential resistance
- Thin liquidity: Few limit orders mean price can move quickly
Execution Priority
Limit orders are prioritized by two principles:
- Price priority: The best limit buy order (highest price) and best limit sell order (lowest price) take precedence
- Time priority: At the same price, the order placed first is executed first (First In, First Out / FIFO)
These rules determine the order in which limit orders in the book are filled.
Limit Orders in Trading
Advantages
- Price control: Exact control over the execution price
- No slippage: The order executes only at the limit price or better
- Queue position: In liquid instruments, a well-placed limit order can execute one tick better than market
Risks
- No execution guarantee: Price must reach the limit level
- Partial fills: The order may only be partially filled
- Adverse selection: When the order fills, price frequently continues in the unfavorable direction — a phenomenon known as adverse selection
Limit Order Variants
- Good Till Cancel (GTC): Remains active until executed or canceled
- Day Order: Expires at the end of the trading session
- Fill or Kill (FOK): Must be executed entirely and immediately, or canceled
- Immediate or Cancel (IOC): Executes as much as possible immediately; the remainder is canceled
Common Mistakes with Limit Orders
- Placing the limit too far from market: Traders who place their limit order far from the current price get a better price if filled, but rarely get filled at all. In fast markets, you miss the entry completely. Find the balance between price improvement and a realistic fill probability.
- Ignoring queue position: In liquid instruments, hundreds or thousands of contracts often sit ahead of your limit order. Your order only fills when all previously placed orders at the same level have been served. In fast markets, this can mean your order never gets reached.
- Using limit orders in fast markets: In a rapidly moving market or during news events, a limit order is often the wrong choice. Price blows through your level and does not come back. In these situations, a market order may be the better option despite the slippage.
- Ignoring adverse selection: When your limit order fills, it means enough aggressive pressure existed to reach your level. This pressure frequently continues to move price against you. Plan from the start that fills on limit orders often occur near local extremes.
Frequently Asked Questions
When should I use a limit order instead of a market order?
Limit orders are suitable when you need price control and are willing to wait for execution. In less liquid markets or for larger positions, limit orders avoid the slippage of a market order.
What happens if my limit order is only partially filled?
The executed portion is settled, and the remainder stays as an open order in the book until price reaches the level again or you cancel the remaining order.
Why does my limit order fill and price immediately reverses?
This phenomenon is called adverse selection. Limit orders are typically filled when aggressive market participants push price in the unfavorable direction. The execution of the limit order means sufficient aggressive pressure exists, which frequently moves price further.